Ideology and the Growth of Government

Andrew Pickering James Rockey

Discussion Paper No. 07/599

October 2007

Department of Economics University of Bristol 8 Woodland Road Bristol BS8 1TN

Ideology and the Growth of Government

Andrew Pickering James Rockey

29th October 2007

Abstract

We analyze the impact of ideology on the size of government. In a simple model

the government sets redistribution and provision of public services according to the

preferences of the median voter, for whom private consumption is a necessity. Ideology

is de…ned on preferences for public services and the impact of ideology upon the size of

government increases with mean income. In empirical work ideology is measured using

data based on party manifestos. Much of the increases and divergence in government

size observed across OECD countries can be explained by the interaction of ideology

and mean income.

Keywords: ideology, Wagner’s law, size of government

JEL Codes: D72, H10

1 Introduction

Over the post-war years total government spending as a fraction of GDP increased in all

OECD countries. However, growth rates have di¤ered markedly. In 1960 "the size of the

public sector was pretty much the same in almost all of the Western developed economies"

(Henrekson and Lybeck, 1988): the OECD average stood at 27.2%. By the late 1990s

total government spending stood around 60% in Sweden and well above 50% in many other

countries of continental Europe and around 35% in Japan, Switzerland and the United States

(Persson and Tabellini, 2003). This divergence is remarkable not least because over this same

time period there was substantial convergence in overall economic development across OECD

members, for example measured in GDP per capita. In this paper we ask whether and how

cross-country di¤erences in ideology, as captured by the ideological positioning of the median

voter, can determine these phenomena. We argue theoretically for, and …nd empirically, a

sizable and signi…cant impact of ideology, and most importantly the interaction of ideology

and the level of GDP per capita. The observed growth, and divergence of government size

is largely explained by ideology, and its interaction with income.

The size of the state has a venerable history as a subject for academic discourse. Theo-

retical studies have o¤ered numerous explanations for the growth of government, although

to date empirical work has not been conclusive.1 Holsey and Borcherding (1997) make a

distinction between ’apolitical’ and ’political’ explanations. The former relate to issues per-

taining to the demand and supply of public services. The latter relate to explanations based

on the political power of particular members of the electorate and perhaps more malevolently

1The following review draws in part from excellent surveys by Holsey and Borcherding (1997) and Lybeck(1988).

1

the incentives facing politicians under alternative constitutional rules.

On the apolitical side Wagner (1893) proposed a "law of increasing state activity" which

is now known as Wagner’s law. Whilst researchers have proposed alternative de…nitions of

this law (e.g. see Peacock and Scott, 2000) the standard interpretation now seems to be

that the income elasticity of demand for publicly provided goods is greater than one (Holsey

and Borcherding, 1997). Peacock and Scott (2000) distinguish between ’traditional’ govern-

ment services such as defence and law and order, and ’newer’ functions such as education,

health and welfare services including employment insurance and state pensions. According

to Wagner’s law the demand for these services in aggregate increases more than one-for-one

with advances in economic development. However, and perhaps surprisingly, Holsey and

Borcherding …nd that the empirical support in favour of Wagner’s law is "mixed at best".

Nonetheless we take Wagner’s law seriously: One particular concern is that Wagner’s law

has not been formalized within an economic model - an omission which we correct in this

paper. In our model income elasticity is positive but diminishing as income rises, and im-

portantly is di¤erent across countries given di¤ering underlying parameters. In particular,

income elasticity is highly dependent upon ideology - and previous empirical work has all

but completely neglected this aspect in determining government size.

Whilst Wagner’s law focuses on the demand side, Baumol’s (1967) cost disease represents

a supply side explanation. In this theory the public sector su¤ers from cost disease because

by assumption only the private sector enjoys technological progress. As wages rise the

relative cost of the public sector must therefore increase and given price-inelastic demand for

government goods the public-sector expenditure share must increase. The literature provides

some evidence in support of aspects of Baumol’s hypothesis (see Holsey and Borcherding,

2

1997), though whilst this is a persuasive story we argue that it does not explain the full

variation in the observed growth of the state in the comparative context. For example,

the cost disease explanation would attribute the greater public sector share in Sweden to

higher relative costs of publicly provided goods in that country. However, the theory asserts

that whilst expenditure increases, the actual quantity of the public services delivered in

equilibrium falls. It is abundantly clear that the actual quantity of public provided services

in the shape of redistribution, healthcare etc. is signi…cantly larger in Scandinavia than

in the US so we conclude that the Baumol explanation cannot fully explain the observed

di¤erences: there is something else going on.

On the political side a seminal contribution is that of Meltzer and Richard (1981). The

role of government in theirmodel is solely to redistribute, and voters have distinct preferences

over the tax rate given their position in the before-tax income (i.e. productivity) distribution.

The poor (rich) prefer higher (lower) taxes in this one-dimensional policy setting and in

equilibrium the median voter prevails. Because income distributions in practice are always

right-skewed the median voter chooses a positive tax rate, though this is less than unity

because voters rationally anticipate the disincentive e¤ect of higher taxes. Their central

result therefore is that greater inequality as captured by the di¤erence between mean and

median income leads to bigger government. Unfortunately the Meltzer and Richard (1981)

hypothesis has not fared at all well when confronted with the data. An obvious example,

again, compares Scandinavian countries with quite equal income distributions, yet large

governments against the US with the reverse. Our view is that cross-country comparisons

of this sort are subject to omitted variable bias, and clearly there are important cultural

and ideology variables that need to be taken into account. It is also the case that Meltzer

3

and Richard understate the complexity of the activities of government. As already alluded

the government’s role in the economy is multi-faceted, including provision of services that

don’t …t neatly into the de…nition of pure redistribution. By including public goods, and

furthermore ideology in the shape of appetite for these public goods, as well as redistribution

we …nd a potential resolution of this empirical failing.

Recent work has focused on the impact of constitutional rules upon the size of govern-

ment. Theoretical work by Persson and Tabellini (1999, 2000), Lizzeri and Persico (2001)

and Milesi-Ferretti et al (2002) argues for a strong e¤ect of the electoral rule, and in par-

ticular whether voting is aggregated proportionally or according to majoritarian systems,

upon the composition of public spending. The theory also is suggestive that proportional

representation leads to larger overall government. Persson et al (2000) argue theoretically

that parliamentary as opposed to presidential government will lead to a larger State. Em-

pirical work by Persson and Tabellini (2003, 2004) …nds that di¤erences in government size

across countries (measured as an average through the 1990s) are signi…cantly explained by

these two constitutional rules.2 This represents a substantial body of work which we aim to

improve upon in two directions. Firstly, as pointed out by Acemoglu (2005), there is a poten-

tial problem of omitted variable bias, and indeed Acemoglu suggests "di¤erences in culture"

amongst other variables as an important underlying factor that potentially co-determines

the constitutional rule as well as the choice of government size. Gabel and Hix (2005) also

make this point, and indeed …nd that ideology3 is signi…cant in the cross-section. However,

unlike Gabel and Hix we construct a model of the demand for government and argue for an

2The bottom line in Persson and Tabellini (2004, p. 39) is that presidential regimes and majoritarianelections are found to each cut the size of government by about 5% of GDP.

3In their study ideology measures are constructed using data from the World Values Survey.

4

interaction of ideology and GDP per capita. Furthermore our empirical analysis uses panel

data, hence we can control for country-speci…c factors that are …xed through time. Secondly,

and following on from this, we also note that Persson and Tabellini’s underlying theories are

essentially static: the predictions for government size hold regardless of the state of devel-

opment (i.e. the level of GDP per capita). However Persson and Tabellini (2004) report (in

column 5 of table 2) that there is no evidence of any constitutional e¤ects using data from

the 1960s. By allowing for a positive income elasticity of demand for public services, that

varies with ideology we derive and estimate a model that can explain the observations of the

60s as well as those of the 90s.

In sum there are a great many well-articulated theories explaining the growth of gov-

ernment. However, empirical work has been far from conclusive. We believe the elephant

in the room is the impact of tastes, culture or ideology.4 Indeed Holsey and Borcherding

(1997) write that "few deny that ideology matters in the size and composition of government

spending" (ibid, p. 587).

In the theory below our interpretation of ideology is that it represents preferences for

publicly provided goods and services, broadly de…ned: leftist cultures are keener on state

provision, and especially of Wagnerian newer functions such as health, education, social in-

surance and indeed what might be termed altruistic redistribution. Rightist cultures are

keener on provision by the market.5 However, and importantly, these preferences are tem-

pered by income. When incomes are low, the pain of taxation in terms of lost utility from

4An exception is Kau and Rubin (2002), who report that the Poole-Rosenthal measure of Senate ideologyhas a small impact on government revenues within the US.

5This is a reasonably consensual view of what is meant by "left" and "right". For example Gabel andHix (2005) write that "In general, voters on the left prefer higher taxes and higher levels of publc spendingthan voters on the right".

5

reduced private consumption is high. Even if the ideological climate is statist (i.e. left-

wing), the median voter in circumstances of low income will not tolerate big increases in

taxes. Consequently at low levels of income we would not expect to see much dispersion

across countries, and ideologies, in terms of government size. However, as income grows,

statist inclinations may be indulged. In terms of utility the pain of taxation is reduced at

higher levels of income and so the left-leaning median voter mandates higher taxes to fund

the Wagnerian goods she desires. The theory thus can predict what is observed in the data:

increases, and divergence in the size of government as GDP levels rise.

In our empirical work we employ the ideology measures of Budge et al (2001). These

data describe comparable ideological positions of political parties along a left-right dimen-

sion for most OECD countries over the period 1945-1998. Using these data Kim and Fording

(2001) derive estimates of the ideological position of the median voter in the country, and

…nd plausible results: Scandinavians are more ’left-wing’ on average, Anglo-Saxon countries

exhibited a right-ward drift through the 1980s and so on. A key advantage of these data is

that they vary through time as well as across space, allowing for analysis of how ideology has

a¤ected the size of government within as well as across countries. The approach taken here

is to regard ideology as exogenous. Fundamentally ideology in our context represents tastes,

and economics traditionally takes these as given. Nonetheless, as with everything, ideology

may well itself have its own deeper determinants and there is an extremely interesting liter-

ature exploring the related question of why some societies are more egalitarian than others.6

However, because we employ panel data our empirical analysis focuses on within-country

6For example Alesina et al (2001) attribute the absence of a welfare state in the US to racial heterogeneity.Alesina and Angeletos (2005) describe how redistributive policy changes depending on di¤erences in beliefson the extent to which income is determined by luck, birth and connections as opposed to merit.

6

variation, and so deeper cultural causes are controlled for in the …xed e¤ects. Furthermore,

because we would expect substantial lags between preferences and enacted policy the ideol-

ogy measure used in the empirical analysis is constructed as an average of lagged ideology

data. We are therefore con…dent that the relationship that we …nd between government size

and ideology, and especially the interaction of ideology and income is causal.

In the next section we derive the model. Section 3 contains our empirical work and

section 4 concludes.

2 The Model

The basic premise is that preferences for public goods and services, in other words ideology,

help to determine the size of government. In order to analyze this formally we modify the

political-economicmodel in the seminal paper by Meltzer and Richard (1981) (MR) to include

spending on a generic public good,7 de…ned as the Wagnerian components of government

spending. In MR the purpose of government is solely to redistribute, thereby …nancing

private consumption. The self-interested voter votes for redistribution so long as it exceeds

the lost consumption from taxation. However as argued above the functions of government

are much more diverse than just narrow redistribution hence in this paper taxation …nances

both redistribution and other public services. In fact it is conceivable that redistribution

desired for altruistic reasons may be thought more of as a Wagnerian public good rather

than redistribution in the MR sense. In order to derive an explicit solution for the size of

the government we follow Meltzer and Richard (1983) and employ the Stone-Geary utility

7Note that ’public goods’ here may be rivalrous and excludable thus are not necessarily pure-public goodsin the Samuelsonian sense.

7

function, which as they note is capable of showing whether the share of income taxed remains

constant, increases, or decreases as income changes.

The objective function therefore is written as

ui (ci, g) = ln (ci ¡ µ) + β ln (g +µ) (1)

where ci is consumption of person i and g is the per capita level of publicly provided goods

and services. As already discussed g represents a substantial component, and probably

the bulk of total government spending (although this is not necessary for our results to go

through). g represents the Wagnerian components of the government activity such as health,

education, and indeed part of redistribution, when it is demanded for insurance purposes

or even altruistic reasons. The public clearly likes these services, but they are separable

from private consumption in the utility function. β > 0 is a preference parameter that

re‡ects liking for publicly provided goods and services, which as argued above characterizes

society’s ideological position. The larger this is, the more left-wing the culture. Finally µ¸ 0is the Stone-Geary parameter. In the spirit of Wagner’s law we model private consumption

as a necessity and public goods as a luxury, so µ is interpreted as the subsistence level of

consumption.

Income, yi, di¤ers across individuals and is taxed at a linear rate, t. As in MR consump-

tion is augmented by lump-sum redistribution, r:

ci = (1¡ t) yi + r (2)

Taxation revenue …nances both redistribution and the public good and given a balanced

8

budget

tδ_y = g + r. (3)

where_y is mean income, and 0 < δ · 1 is a parameter capturing public sector e¢ciency

(high δ) or waste (low δ). This waste could be due to the argument that higher taxes reduce

incentives to work hence reducing mean income from what it would otherwise be, as well as

representing tax revenue expropriated or spent on non-productive ego-projects etc. De…ning

0 · ϕ · 1 as the share of tax revenue spent on public services, then

g = ϕtδ_y (4)

r = (1 ¡ϕ) tδ_y. (5)

The utility function can therefore be rewritten as

ui (ci, t) = ln¡yi (1 ¡ t) + (1¡ ϕ) tδ

_y ¡ µ¢+ β ln ¡ϕtδ_y + µ¢ . (6)

An assumption made here is that ϕ is …xed exogenously thus reducing the policy space to

one dimension.8 The gain in doing this is that, as shown by Roberts (1978) the political

equilibrium exists and is characterized by the choice of the median voter. It is well known

that a Condorcet winner generally will not exist given two policy variables. A possible

justi…cation for making this assumption could be public sector inertia: if various departments

of government have particular power in claiming shares of the overall tax revenue pot then

changes in relative spending may at least be slow. Voters would therefore take this as given

8An alternative would be to set ϕ = 1, which would be a special case of the model analysed.

9

when identifying their preferred tax rate. It can be seen from (6) that when ϕ = 0 the model

reduces to the case considered by Meltzer and Richard. In this environment the poor are

increasingly keen to tax and redistribute. In the case of ϕ = 1 we have a purely Wagnerian

model, and in this case it is the rich that are keener to tax given the utility function (note

either way and for all points in between the median voter is still the Condorcet winner).

By considering the general case we can identify whether and how the spending pattern of

government alters the impact of ideology upon government size.

The optimal choice of the median voter is given by di¤erentiating (6) and solving for t

giving

t¤ =βϕδ

_y ¡ [1¡ (1 ¡ ϕ) δm]µ¡ βϕδmµϕδ

_y (1 + β) [1 ¡ (1¡ ϕ) δm] (7)

where m =_y/ym > 1 is the ratio of mean income to median income (ym). In order to ensure

0 · t¤ < 1 two conditions are formally required:

_y ¸ mµ+ [1¡ (1¡ ϕ)δm]µ

βϕδ(8)

[1 ¡ (1¡ ϕ) δm] > β

1 + β(9)

Condition (8) ensures that t¤ ¸ 0 and can be described as a minimum development require-ment: mean income must be su¢ciently large relative to subsistence (µ) such that there

are incentives for the median voter to tax at a positive rate. Since our focus is on OECD

countries we argue this is a reasonable assumption. Condition (9) ensures that t¤ < 1. This

will obtain as long as the level of waste is high (i.e. δ is quantitatively small) enough to

dissuade the median voter from increasing taxes further. Given that it is plausible that δ

10

would approach zero as t approaches 1 due to the increasing disincentive e¤ect of taxation

this condition would be satis…ed for any value of β. Formalizing the exact relationship be-

tween δ and t substantially complicates the model, and more importantly is unnecessary for

our objective.

Given equation (7) and conditions (8) and (9) we have the following proposition, for

which formal details are available in the appendix.

Proposition 1 (i) Ideology. Holding_y, m and the other model parameters constant, a

higher value of β entails a larger state. The more left-wing a country’s ideology, the larger

its government.

(ii) Wagner’s law. Holding β, m and the other model parameters constant,

government grows with mean income. Furthermore the income elasticity of the demand for

government is positive, but diminishing.

(iii) Interaction. Given δm > 1 di¤erences in government size due to ide-

ology will increase with income.

Part (i) of proposition 1 is straightforward and unsurprising: given our de…nition of Left-

wing ideology as an increased liking for state provision, then a higher value of β corresponds

to relatively left-wing preferences, and a larger state, holding other variables constant.

Part (ii) of proposition 2 formalizes Wagner’s law. From ’take-o¤’ GDP,_y0 (i.e. that

level of_y de…ning (8) with equality) taxes increase from zero to some limit. Nonetheless in

this set up policy does not su¤er from Peacock and Scott’s (2000) ’reductio ad absurdum’,

11

that the state will eventually absorb the entire economy. From (8) and (7) we have,

_y0 = mµ+

[1 ¡ (1¡ ϕ) δm]µβϕδ

(10)

lim_y!1

t =β

(1 + β) [1¡ (1¡ ϕ)δm] . (11)

Equation (10) de…nes the level of development at which the state takes o¤. Equation (11) is

less than unity given (9). In a world of positive economic growth at the limit the public sector

converges to some ’steady State’ which is increasing in left-wing ideology and government

e¢ciency (i.e. characterized by high values of δ). The ’steady State’ also is increasing in

inequality (m) for precisely the reasons given by Meltzer and Richard (1981) - the further

away the median from mean income, the greater the extent of redistribution from the rich

to the poor, all else equal.

The income elasticity of the demand for overall government size is positive, although

diminishing as the economy grows. The fact that the growth of government is at …rst rapid

is due to the functional form of the utility function: once subsistence has been achieved, the

median voter then allocates a constant proportion of her marginal income to both private

consumption and the public good, g. Overall the proportion of total income devoted to

public sector activities (redistribution and provision of public goods) increases and converges

towards some level that is in large part determined by tastes for public provision or ideology

as characterized by the parameter β.

Finally, part (iii) of proposition 1 establishes that the impact of ideology upon government

size is state-dependent. If δm > 1 then the di¤erence in government size between two

countries of alternative ideological persuasion will expand as their economies grow, otherwise

12

the di¤erence will fall. We argue this condition is likely to be met within OECD countries:

as long as waste is not too serious (i.e. δ not too low), for a su¢ciently skewed income

distribution the impact of given ideological di¤erences increases as mean income increases.

Thus, di¤erences in government size in leftist and rightist countries at low levels of income

tend to be small. As incomes rise the capacity for state expansion rises and di¤erences in

ideology manifest themselves more concretely.

In …gure 1 we calibrate the model for archetypal left- and right-leaning countries (think of

Sweden vs the US). The model parameters are enumerated as follows: µ = $2000, ϕ = 0.75,

m = 2, δ = 0.8 (though the general argument is robust to alternative parameterizations). For

the left- (right-) wing country we parameterize ideology as βL = 0.6 (βR = 0.3). As would

be expected take-o¤ happens somewhat sooner in the left-wing country (at a mean income

of $7333 instead of $10667), although given the reasonably large di¤erence in ideologies the

di¤erence is not that vast. For example if the left-wing country (again think Sweden) has

a larger subsistence requirement (e.g. food & heating) then this could shift take-o¤ to the

extent it happens earlier in the right-wing country. Numerically if µ is increased to $3000

then take-o¤ in the left-wing country is put back to $11000. However, once income starts to

grow then the State in the left-wing country grows faster (because δm = 1.6 > 1) and the

ideological di¤erence between the two countries manifests itself increasingly strongly. At the

limit the left-wing country’s government grows to 62.5% whereas in the right-wing country

the state share of GDP grows to no more than 38.5%. It is this interaction between GDP

levels and ideology that we argue explains much of the growth, and divergence across OECD

countries in the latter half of the last century.

En passant we revisit Meltzer and Richard’s line of enquiry and examine the relationship

13

between government size and inequality. Di¤erentiating (7) with respect to m yields

∂t¤

∂m= ¡ β

©µ¡ (1 ¡ ϕ) δ_yª

_y (1 + β) [1¡ (1 ¡ ϕ) δm]2 ? 0. (12)

According to equation (12) the size of the state may be increasing or decreasing with respect

to inequality. The condition for this is whether or not (1¡ ϕ) δ_y ¡ µ is greater or less

than zero. The Meltzer and Richard case corresponds to ϕ = 0 and δ = 1 hence (12)

is positive for all of the relevant income range. In the general setting this holds once_y

becomes su¢ciently large and as apparent from equation (11) taxation must eventually be

increasing in inequality. Given positive economic growth eventually the Meltzer and Richard

hypothesis that inequality leads to larger government, will preside. However, at low levels of

GDP it is feasible that the median voter’s preferences are for lower taxes, given a su¢ciently

wasteful government (small δ) or a su¢cient weight on public goods in the budget (large ϕ).

Marginal utility of consumption is high at low income levels, and increased taxes only come

back partially as …nance for additional consumption due to spending on public services and

waste. We make these observations because empirical evidence on the Meltzer and Richard

hypothesis has on the whole been quite weak. The argument presented here re…nes their

argument by saying the relationship between inequality and government size is potentially

ambiguous at low levels of income when concerns over subsistence may dominate concerns

over (partial) redistribution in circumstances where the government spends money outside of

redistribution on Wagnerian public services and indeed may also be wasteful. In …gure 2 we

consider how the size of government evolves under equal (m = 1.5) and unequal (m = 2.5)

income distributions9 and …nd that at low levels of income, there is barely any di¤erence

9Here β is set equal to 0.5 and the other parameters are set as for …gure 1.

14

between the two. Indeed at mean income levels below $10,000 the preferred tax rate is higher

for the equal distribution. This is because at these low income levels the pivotal voter is

poorer under the unequal income distribution than the egalitarian income distribution, and

is more concerned with subsistence than the fruits of public spending.

Before proceeding to the empirical work it is worth considering how robust the central

proposition is to relaxing the assumption of exogeneity of ϕ. One possible conjecture would

be that ϕ increases with mean income (again holding the distribution of income constant).

The electorate, as it grows richer would have more of the ’luxury’ aspects of state provision

than pure redistribution, as the marginal utility of consumption would surely be falling.

Given a higher value of ϕ as income rises, then the increased impact of ideology is likely to

be further increased as g becomes a larger fraction of government spending.

3 Evidence

The empirical analysis focuses on 17OECD countries that have been democracies throughout

the post-war era. The countries are Australia, Austria, Belgium, Canada, Denmark, Finland,

France, Germany, Iceland, Ireland, Italy, the Netherlands, Norway, Sweden, Switzerland, the

UK and the US.10

The dependent variable is total government outlays as a percentage share of GDP, from

theOECD EconomicOutlook database. Figure 3 depicts these data, which show considerable

anti-cyclicality as would be expected, and more relevantly over the long run an upward trend

in all countries. The increasing dispersion across countries is also noteworthy, especially

10These countries were chosen purely on the criteria of their being democracies throughout the period andthere being available data for both total government outlays and ideology.

15

so given the convergence in GDP per capita and more broad development terms across

OECD members over this time horizon. Our argument is that the impact of ideology on

the median voter’s preference for public goods increases as marginal utility of consumption

of private goods declines. The median voter thus becomes increasingly liberated to exercise

her preferred public-sector outcome with increases in the level of economic development.

In …gures 4-6 the dependent variable is graphed against GDP per capita in constant 1985

dollars for each country. These graphs make clear a number of facts central to our argument.

Firstly over the sample there is a positive relationship between government size and GDP per

capita in all countries. Second, the relationship often appears to be non-linear. In second-

order polynomial trend regressions the linear term is positive, whilst the quadratic term is

negative in most cases.11 The only countries for which the quadratic term is positive are

Finland and France and in both cases these estimates are statistically insigni…cant: Given

the small sample size this provides reasonable support for the argument made above, that the

income elasticity of the demand for government is positive, but diminishing. Third, income

elasticity di¤ers substantially across countries. For example the Scandinavian countries and

some of the countries of mainland Europe exhibit fairly steep slopes, whereas in countries like

Australia, Iceland, Switzerland and the US government size is apparently less income elastic.

In recent years government size has fallen to an extent in a number of countries (Ireland, the

Netherlands and the UK are notable cases). This may be attributable to cyclical factors,

though might also be due to a rightward shift observed in the ideology data during the 1990s.

For our ideology data we utilize theManifesto Research Group (MRG) data of Budge et al

(2001). These data summarize left-right ideology at the level of the party, and following Kim

11This …nding is robust to the inclusion of the control variables as used in the regression analysis below.

16

and Fording (2001) annual series are constructed for the median voter ideological position

in each country. Country level averages of these data are presented in …gure 7 showing,

as would be expected, that the Scandinavian countries are on average substantially more

left-wing than say the US or Australia. It is perhaps surprising that the UK is left of the

Netherlands and Denmark on average through this time period, but as would be expected

the UK exhibits a marked drift to the right in the 1980s and the period 1945-1979 (i.e. prior

to Thatcher) constitutes around 2/3 of the data set.

Figure 8 illustrates the ideology series over time averaging over countries with Propor-

tional Representation (PR) and Majoritarian electoral rules respectively. Following Persson

and Tabellini’s (2003) de…nition the majoritarian countries are Australia, Canada, France,

the UK and the US. In the 1950s and 1960s both sets of democracies if anything exhibit a

trend to the left, though during this period neither is consistently di¤erent from the other.

Things change markedly in the late 1970s with the right-ward shift in the Anglo-Saxon coun-

tries. In the 1990s median voters in the PR countries have also apparently shifted to the

right, though they remain on average left of their colleagues in the Majoritarian countries.

Because in reality there are substantial lags between preferences as expressed in the ide-

ology data, and policy enacted by government, in the regression analysis below we use a

moving average of the previous 10-years’ MRG data for each country to construct a measure

of the current aggregate ideological position for that country. This procedure also miti-

gates against concerns of endogeneity - the ideology measures now substantially predate the

observations on government size, and are thus pre-determined. This measure is then trans-

formed12 to facilitate inference, so that our …nal ideology measure, ideoit are scaled from

12The MRG median voter data takes values from -100 (extreme left) to +100 (extreme right). We transform

17

minus unity (extreme right) to unity (extreme left). In …gure 9 averages of these data are

plotted against average government size in the 1990s. The correlation coe¢cient between

these two variables is 0.7, and the …gure shows that ideology can potentially explain a lot of

the observed variation in government size across countries.

To examine the relationship between government size, income and ideology more system-

atically we now turn to panel data analysis. The econometric analysis follows Persson and

Tabellini (2003) (PT), except the analysis here is restricted to just the OECD countries for

which we have ideology data and which have been democracies throughout. Their analysis

(out of necessity given their wider scope) focused on central government expenditure only.

However, for the OECD countries it is possible to use total government outlays as the depen-

dent variable (following the notation used in section 2 denoted t), which is preferable in that

it includes expenditures made by local government. We employ the same control variables13

used as standard by PT, and in addition, use their cyclical control variables14, as these are

in most cases signi…cant in the case of the OECD countries. Finally, the lagged dependent

variable is also included as a regressor throughout because of the substantial persistence in

this variable.

In table 1 total government outlays (t) are regressed upon income, ideology and the

interaction of ideology and income. Columns (1a) and (2a) show the results for the full

the data according to ideoit = (¡______

MRG it)/100 where______

MRG itis the mean of the past 10 years medianvoter position constructed as in Kim and Fording (2001).13Speci…cally ’PROP1564’ - the percentage of the country’s population between 15 and 64 year of age in

the total population, ’PROP65’ - the percentage of the country’s population over the age of 65 in the totalpopulation, ’TRADE’ - the sum of exports and imports measured as a share of GDP,14The cyclical control variables are ’YGAP’ - the deviation of aggregate output from its trend value in

percent, ’OIL_EX’ - the oil price multiplied by a dummy variable equal to 1 if net exports of oil are positiveand ’OIL_IM’ - the oil price multiplied by a dummy variable equal to 1 if net exports of oil are negative.

18

sample using …xed e¤ects but without common time e¤ects. Given the presence of the

lagged dependent variable the parameter estimates in these columns re‡ect the current-

period (or short-run) impact upon t of the explanatory variables. In columns (1b) and (2b)

corresponding ’long-run’ parameters estimates are presented,15 illustrating the impact of

particular levels of income and ideology upon the long-run steady state level of t - which we

denote t¤.

In column (1) the direct impact of income upon government size is positive and statisti-

cally and economically signi…cant. In this sample a one standard deviation ($3300) increase

in Y would increase outlays by about 4.4% of GDP in the long run. Perhaps surprisingly the

direct impact of ideology in column (1) is estimated to be negative - contrary to expectation.

However, the overall impact of ideology turns out to be positive because of the interactive

e¤ect with income. The full impact of ideology is modelled as a linear function of income,

and what we term here the direct impact is the intercept of that function. Because the slope

(interaction) term is always su¢ciently large, the full impact of ideology is positive as would

be expected.16

To assess the impact of ideology through time consider the increase in the size of the

State in what we term an archetypal left-wing country (say Sweden) compared with that in

15Given the regression tt = αtt¡1 + βYt + γIt + δYtIt + ... the long-run level of t is taken as t¤ =β

1¡α Yt +γ

1¡α It +δ

1¡αYtIt + ... = λYt + µIt + νYtIt + .... The long-run parameters, λ, µ, and ν and theirstandard errors are estimated iteratively using the Delta method.16Nonetheless, the negative direct e¤ect, even if in economic terms quite small (the standard deviation of

the ideology variable is 0.12) is an interesting …nding. One possible rationale could be that electorates areinclined towards left-wing regimes when the economy is on the upslope of the business cycle, but inclinedtowards right-wing regimes after the economy has peaked. Given the anti-cyclical nature of t this would leadto the negative direct relationship observed in the data. However, and most importantly, the interactionterm itself is estimated to be positive and statistically signi…cant at the 1% level, and is economically sizeableas well.

19

an archetypal right-wing country (say the US). The left- (right-) wing country has constant

ideology set equal to one standard deviation (0.12) above (below) the mean ideology score

(0.04) in the sample. In 1960 mean income was $6185, and in 1998 means income was

$15881. Given this increase in income in both countries, and holding other controls constant,

the overall increase in the steady-state level of the size of government (t¤) in the right-wing

country is 9.41% of GDP, whereas the increase in the left-wing country is 20.32%. This is

a sizeable di¤erence and may explain why Persson and and Tabellini (2004) …nd that the

electoral rule has an impact on the size of government in the 1990s but not in the 1960s:

If majoritarian countries are typically right-wing, and countries with PR electoral rules are

typically left-wing (and Figure 8 is at least suggestive of this), then our model would predict

the data - but of course the mechanism is now straightforward median-voter demand, rather

than due to the constitutional rule itself.

As a further experiment to examine the impact of ideology upon t column (2) drops the

interactive term. Now the ideology variable becomes positive and signi…cant at the 1% level

- giving further credence to the argument that the negative (and insigni…cant) estimate of

the direct e¤ect in column (1) needs to be understood in the context of the presence of the

interaction term. If we take the switch from being archetypally right to archetypally left

(a two-standard deviation change in ideology), then long run impact of this switch is an

increase in the size of government of 5.76%. Nonetheless, this is we argue a crude estimate

of how ideology impacts upon the size of government, because its impact, both theoretically

and empirically, depends strongly on the level of economic development.

Table 2 contains regression results when common time e¤ects are also included. This

table also contains regression results for reduced samples depending on the electoral rule.

20

Whether looking at the full sample or either of the sub-samples the direct impact of income

now becomes insigni…cant as the time e¤ects now do a better job of capturing the common

trend than income itself. The direct impact of ideology is again estimated to be negative,

and in the cases of the PR countries (column 2) this relationship is statistically (if not eco-

nomically) signi…cant. Nonetheless, once again the interactive term is in all three regressions

estimated to be positive and signi…cant at the 1% level, and sizeable. The parameter es-

timates are comparable with the results in table 1, and leftist and rightist regimes would

diverge substantially given representative income increases. A striking conclusion from table

2 is that there are not substantial di¤erences across electoral rules in how government size

responds to income and ideology.

The …nding of a statistically, and economically signi…cant impact of the interaction of

ideology and income holds up in all of our econometric speci…cations. It can explain a

substantial component of the growth, and divergence of government size in OECD countries

over the latter half of the twentieth century.

4 Conclusion

This paper asks how ideology a¤ects the size of government. We de…ne left (right) ideology

as relative (dis-)liking for public provision over private consumption, and in a simple model

where private consumption is a necessity, and public services are luxury goods, then the

impact of ideology increases with the level of income. Using data from party manifestos,

time-varying measures for the median-voter’s ideological position are constructed. These

data have a signi…cant impact upon government size, but most critically, this impact increases

21

with the level of economic development. At 1960s income levels the impact of ideology on

government size is small. At 1990s income levels the impact is large. Our model, and the

ideology data we use can thus explain observations in the 1960s and 1990s and indeed why

there has been such divergence over the OECD countries through this period.

Part of the motivation for the paper was as an investigation of Persson and Tabellini’s

(2004) …nding of signi…cant e¤ects of constitutional rules. We would not argue that the

results presented here are su¢cient to negate their argument. For one thing their data set is

much larger; we are restricted due to the limited availability of ideology data. For another it

is not possible to separate out the non-time-varying constitutional rule from the …xed e¤ect

in panel analysis. Nonetheless, we do feel that ideology casts an important shadow over their

results. Our theory can explain the 1960s observations as well as the 1990s observations,

and it does appear that ideology is correlated with electoral rules, at least in the smaller set

of countries studied here.

22

Appendix - Proof of Proposition 1

part (i)

Di¤erentiating (7) with respect to β gives

∂t¤

∂β=

ϕδ_y + µ (1¡ δm)

ϕδ_y (1 + β)

2[1¡ (1¡ ϕ) δm] .

Proposition 1 requires this expression to be positive. The denominator of this expression

is positive from (9), hence we require ϕδ_y > µ (1¡ δm). From (8) this holds a fortiori if

ϕδnmµ+ [1¡(1¡ϕ)δm]µ

βϕδ

o> µ (1¡ δm). Rearranging, this implies βmµ+[1 ¡ (1¡ ϕ) δm]µ >

βµδm¡βµm. Using again (9) the …rst and second terms on the LHS are respectively greaterthan those on the RHS.

part (ii)

Di¤erentiating (7) with respect to_y gives

∂t¤

∂_y=µ f[1¡ (1 ¡ ϕ) δm] + βϕδmgϕδ

_y2(1 + β) [1¡ (1¡ ϕ) δm]

. (A1)

Given (9) this is positive by inspection. The second derivative is negative, thus establishing

the second part of the proposition:

∂2t¤

∂_y2 = ¡

2µ f[1 ¡ (1¡ ϕ) δm] + βϕδmgϕδ

_y3(1 + β) [1¡ (1 ¡ ϕ) δm]

.

23

part (iii)

Di¤erentiating (A1) with respect to β gives

∂2t¤

∂_y∂β

=µ [δm¡ 1]

ϕδ_y2(1 + β)2 [1¡ (1¡ ϕ) δm]

.

Given (9) the sign of this expression depends on the sign of δm¡ 1.

24

projected government size

0

0.1

0.2

0.3

0.4

0.5

0.6

0 10000 20000 30000 40000 50000

income

size

of t

he S

tate

(t)

archetypal right-wingarchetypal left-wing

Figure 1: Projected government size for archetypal left- and right-wing regimes

Calibration: ϕ = 0.75,m = 2, µ = 2000, δ = 0.8, βL = 0.6, βR = 0.3

25

projected government size

0

0.1

0.2

0.3

0.4

0.5

0.6

0 10000 20000 30000 40000 50000

income

size

of t

he S

tate equal

distributionunequaldistribution

Figure 2: Projected government size and income for equal and unequal income distributions

Calibration: ϕ = 0.75, µ = 2000, δ = 0.8, β = 0.5,mequal = 1.5,munequal = 2.5

26

Figure 3: Total Government Outlays as a share of GDP. Source: OECD Economic Outlookdatabase

27

Figure 4: Size of government (t) and real GDP per capita (1985 PPP). Source: OECDEconomic Outlook and Persson and Tabellini (2003) - from Penn World Tables.

28

Figure 5: Size of government (t) and real GDP per capita (1985 PPP). Source: OECDEconomic Outlook and Persson and Tabellini (2003) - from Penn World Tables.29

Figure 6: Size of government (t) and real GDP per capita (1985 PPP). Source: OECDEconomic Outlook and Persson and Tabellini (2003) - from Penn World Tables.

30

Average median voter ideological position by country, 1945-1998

-30

-25

-20

-15

-10

-5

0

5

10

15

20

Nor

Swe Fin

UK Net

Den Ita Bel

Can

Ger

Fra

Aut

Swit Ire Aus US Ice

country

Deg

ree

of c

onse

rvat

ism

Figure 7: Average median voter ideological position by country 1945-1998. Source: Budgeet al (2001).

31

Average median voter ideology in Majoritarian and PR countries

-20

-15

-10

-5

0

5

10

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

year

degr

ee o

f con

serv

atis

m

MajoritarianPR

Figure 8: Average Median Voter ideology in majoritarian and PR countries. Author’s cal-culations using data from Budge et al (2001).

32

average government size in the 90s versus average median voter ideology 1945-98

Nor

Swe

Fin

UK

Den

Nld

Ita

BelFra

Aut

Ire

Ger

Can

Ice

Che

AusUSA

y = 127.42x + 47.439R2 = 0.4905

30.0

35.0

40.0

45.0

50.0

55.0

60.0

65.0

70.0

-0.1 -0.05 0 0.05 0.1 0.15

ideology (left-wing scale)

size

of g

over

nmen

t

Figure 9: Average government size in the 90s versus average median voter ideology 1945-1998.

33

(1a) (1b) (2a) (2b)

L.Outlays0.883

(0.017)¤¤¤

0.892

(0.017)¤¤¤

Y0.157

(0.048)¤¤¤

1.345

(0.351)¤¤¤

0.150

(0.048)¤¤¤

Ideo¡2.772(2.552)

¡23.68(21.16)

2.663

(1.209)¤¤¤

24.351

(12.35)¤¤

Y-I0.548

(0.228)¤¤¤

4.685

(1.923)¤¤¤

Sample OECD OECD OECD OECD

Number of Observations 625 625 625 625

Number of Countries 17 17 17 17

R2 (within) 0.95 0.95

Table 1: Dynamic panel estimation with …xed e¤ects

Notes: Panel regressions of Government Outlays as a percentage share of GDP including

PROP1564, PROP65, TRADE, YGAP, OIL_EX, OIL_IM as control variables. OECD

comprises the entire data set. L.Outlays is the lagged dependent variable. Y is income per

capita in $000s of 1985 0prices (PPP), ideo is the ideology variable described in the text,

Y-I is the interaction (product) of Y and ideo. Standard errors are shown in parentheses.

Columns (1b) and (2b) contain ‘long-run’ parameter estimates - see the text for details on

how these are estimated.

34

(1) (2) (3)

L.Outlays0.913

(0.017)¤¤¤

0.913

(0.023)¤¤¤

0.892

(0.017)¤¤¤

Y¡0.091(0.109)

¡0.131(0.154)

0.308

(0.186)

Ideo¡4.071(2.153)¤

¡7.469(2.871)¤¤¤

¡4.555(3.872)

Y-I0.471

(0.191)¤¤¤

0.806

(0.275)¤¤¤

0.572

(0.298)¤¤¤

Sample OECD PR Maj

Number of Observations 625 437 188

Number of Countries 17 13 5

R2 (within) 0.97 0.97 0.98

Table 2: Dynamic panel estimation with …xed e¤ects and time e¤ects

Notes: As for table 1. PR comprises the subset of observations with Proportional Represen-

tation electoral rules, Maj the subset of observations with Majoritarian electoral rules

35

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